Gone are the Days of Handshake Deals
Handshake deals, simplistic contracts, and set and forget management practices are in the past. Examiners at both the state and federal level are focusing on technology service provider’s contracts at financial institutions and ongoing vendor management and oversight. This shift is partly due to the growing complexity of technology services and partly due to concern that financial institutions have not performed adequate oversight of their vendors.
In a letter to the financial institutions it supervises, the FDIC noted, “Some contracts do not require the service provider to maintain a business continuity plan, establish recovery standards, or define contractual remedies if the technology service provider misses a recovery standard. Other contracts did not sufficiently detail the technology service provider’s security incident responsibilities such as notifying the financial institution, regulators, or law enforcement.”
Additionally, the Federal Financial Institutions Examination Council includes a list of actions financial institution management should take prior to signing a technology vendor contract in its “Outsourcing Technology Services” handbook including ensuring the contract clearly defines the rights and responsibilities of both parties, contains adequate and measurable service level agreements, and does not contain any adverse provisions.
Evaluating your technology vendor contracts to ensure they meet your short and long term needs, adequately address business continuity and incident response risks, and clearly define rights and responsibilities can be a challenging and time-consuming task. It is critical to best position your institution to be able to reach an agreement that meets your requirements, documents your agreement on the service levels required, and provides a solid foundation for a long-lasting relationship.
Proper planning and negotiation can be significant contributors to your institution’s ability to respond to market conditions, drive growth, and improve the balance sheet. With the aid of market data, your technology advisor, and legal counsel, you can position your institution to obtain a comprehensive contract, with acceptable terms and conditions, at a fair price for the short and long term.
Negotiations should include the following:
Review overall solution and price
Before finalizing pricing, you should evaluate the vendor’s proposal and appraise pricing as it relates to market value, growth, strategy, and potential future expenses, and ensure the proposal contains the most appropriate pricing method for your institution’s needs.
- Make sure the proposal fully describes the calculation of fees for base services, including any development, conversion, and recurring services, as well as any charges based on activity volume or any special requests.
- Be conscious of additional costs for purchasing and maintaining hardware and software.
- Complete a detailed investment analysis to ensure the proposal aligns with, and contains, all of the agreed upon services.
- Request clarification on all outstanding questions related to the proposal to ensure any discrepancies are addressed.
- Based upon your evaluation, identify price requests and hold a meeting with the vendor to discuss. Afterwards, assess the updated proposal and finalize pricing.
Appraise terms and conditions
Before signing a contract, you should ensure the rights and responsibilities of both parties are clearly defined and the contract does not contain provisions or incentives that may adversely affect your institution, including significant cost increases after the first few years, and/or substantial termination penalties. Termination penalties, specifically, can put an end to merger and acquisition discussions if the penalties are so severe the deal is no longer viable.
- Review the contract language carefully. Pay attention to security and risk management issues, backup and recovery services, and technical support.
- Make sure you understand service level agreements, which are formal documents that outline your institution’s predetermined requirements for the service and establish incentives for meeting, or penalties for failing to meet, the requirements. Service levels should be measurable and include contractual remedies if the vendor misses a service level.
- Confirm you have a clear understanding of training and implementation requirements for resources, timing, and expectations for any new products and services before finalizing the contract. Review personnel and technology requirements and request a training and implementation plan from the vendor. Develop a communications plan, which will lead to a successful implementation of any new products and services.
- Work with your trusted technology advisor and legal counsel to discuss contract considerations related to required services, strategic considerations, performance and functionality, and overall relationship expectations.
- Once you have identified contract requests, hold a meeting with the vendor to discuss.
Finalize the agreement
Continue to meet until an agreement is reached between your institution and the vendor on price, contract terms, and service levels. Developing a contract that clearly defines the expectations and responsibilities of the vendor helps limit your institution’s liability, ensure the contract’s enforceability, and mitigate performance disputes.
Evaluating your technology vendor contracts can be a complicated and time-intensive process. The contract is the single most important control in your ongoing relationship with the vendor. Plan ahead to complete a thorough review, due diligence, and negotiation of pricing and terms that protect your institution before the ink is on the contract.
How we can help
CLA is here to know you and help you. CLA’s Technology Advisory and Strategy team has developed a contract advisory methodology for financial institutions directly aligned with industry standards and best practices. Whether your institution is considering new products or services, looking to renew technology vendor contracts, seeking operational efficiencies, or considering a merger or acquisition opportunity, our technology advisors can assist you with achieving favorable rates, conducive terms, and enforceable service agreements.
Our tailored approach, along with our team’s extensive knowledge, adds recognizable value to each engagement. Our clients benefit from our hands-on experience, knowledge, and insight obtained working in financial institutions and within the industry nationwide. We have a team of technology advisors ready to help you evaluate your technology vendor contracts. Please fill out our contract opportunity assessment form and we will be in touch with you. You may also contact your CLA representative anytime for more information.
Janine is a Director in the Technology Advisory and Strategy group at CLA. She has more than 20 years of financial institution experience and works exclusively with financial institutions with varying levels of complexity. She specializes in reviewing and evaluating vendor technology contracts to ensure alignment with critical business objectives, service and performance expectations, and equitable pricing. She also conducts assessments for pre-post conversion, digital services, debit and credit card services, and website design, development, and hosting.
Comments are closed.